TASC Paying for Water

Paying for Water

Equity, Efficiency and Sustainability

Paying for Water: Equity, Efficiency and Sustainability | June 2013

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Paying for Water

Preface1

In order to meet the challenge of providing a clean and secure water supply now and into the future,

TASC recommends the introduction of an equality-proofed water charges regime based on metering

to promote conservation at the household level and to provide increased funding for the sector.

In a previous submission on water charging made by TASC (2012), we argued that charging for good

quality water and recognising it as a basic human right are not mutually exclusive. Any such charging

regime must be based on the ‘polluter pays’ principle and the use of flat charges or proxies for water

use (e.g. square footage), will not promote conservation and will likely be regressive. TASC’s analysis

is that the use of a free water allowance or a similar mechanism would neither satisfy the ‘polluter

pays’ principle nor provide equality: such a universal free allowance would be a subsidy for all

households regardless of means and circumstances.

Access to good quality, clean and affordable water is a human right. Water and waste water services

are also vital for farms and businesses throughout the state. However, the provision of these

services is not free, it must be paid for. Currently, water services are financed through a combination

of general taxation and rates. Notwithstanding the boost in investment in the last number of years,

the water sector has suffered historically from underinvestment. Greater investment in

infrastructure will be required over the coming years if Ireland is to have efficient, safe and

environmentally sustainable water provision. Achieving greater efficiency, environmental

sustainability and increased investment in order to deliver high standards demands a rethink in how

we fund our water services.

Therefore TASC recommends the establishment of targeted differentiated water allowances, which

would supplement the capacity to pay of low-income and vulnerable households.

Our previous submission discussed the political, economic and environmental context for the

establishment of water charges. It also highlighted the need to ensure that links between the local

authorities and Irish Water are formalised in any new structure to ensure maximum co-ordination

and the application of common standards across the country. The submission also emphasised the

need to ensure that any new legislation establishing Irish Water includes a section ensuring that

water provision remains in the public sphere. The purpose of this paper is to provide a deeper

examination of water charging models and policy tensions.

1 Corresponding authors can be contacted at [email protected] (Tom McDonnell) or

[email protected] (Aoife Ní Lochlainn).

mailto:[email protected]

mailto:[email protected]


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Paying for Water

Summary

TASC’s analysis results in the following proposals:

1. A programme for metering and charging should be introduced by the Government in the next few years.

2. The metering programme should be funded through the capital budget.

3. The Government should not introduce any interim charges (e.g. flat charges) in lieu of metering as this would unfairly affect lower income households.

4. Legislation establishing the new water utility should include a section precluding the privatisation of any part of water provision.

5. TASC’s proposals for water charging have been equality-proofed and are in line with the ‘polluter pays’ principle. Water charges should take the following form:

a. Increasing block tariffs metered on a household basis with high marginal rates in the upper blocks.

b. The tariff structure should include a recurrent fixed component in order to ensure long-run financial sustainability of the water utility.

c. To protect vulnerable households and prevent hardship, the chosen water pricing model should be supplemented by income supports in the form of differentiated water allowances. Differentiated water allowances are a more economically and ecologically efficient method of solving the affordability problem than universal free allowances.


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Paying for Water

Introduction

Clean water is an economic good. It is not costless. Water is heavy and difficult to transport, and the

provision of water and waste water services requires the construction, operation, maintenance and

improvement of expensive network infrastructure. Such costs must be financed through present or

future taxation, through tariffs, or through a combination of both. In Ireland, the provision of water

services is mainly funded through general taxation.

TASC supports the logic of the ‘polluter pays’ principle. As a consequence, TASC supports the

decision to fund water services in the future through water charges based on the level of water

usage, and paid for by the user. However, access to water is also a human right, and the availability

of clean affordable water and waste water services is essential to a decent quality of life. Thus

careful consideration of the appropriate structure for domestic water charges is required. It is

possible to reconcile equity, efficiency and sustainability goals through a well-designed system of

water charges that is supplemented by measures to protect vulnerable low-income households.

TASC proposes a model for domestic water charges that is predicated on the ‘polluter pays’

principle. We argue against the introduction of a universal free water allowance. Universal water

allowances are a highly costly and inefficient means of easing affordability concerns for low-income

households. Instead, each unit of water should carry a charge, and this charge should reflect the cost

of providing that unit of water. Specifically, TASC is proposing that water charges should be based on

water usage (volumetric pricing) and should take the form of increasing block tariffs, metered on a

household basis, with high marginal rates in the upper blocks. Under a system of increasing block

tariffs, water usage becomes progressively more expensive per unit consumed. In other words,

water in the second block is more expensive per unit volume than water in the first block, while

water in the third block is more expensive per unit volume than water in the second block, and so

on. The purpose of increasing block tariffs is to penalise wasteful use of water, and reduce overall

demand for water services, without penalising the use of water for essential day-to-day purposes.

Water meters are a necessary prerequisite for any system of water charges based on volumetric

pricing.

Water charging models must attempt to reconcile four main policy goals:

1. Affordability and social justice;

2. Financial sustainability of water services as a non-profit utility;

3. Economic efficiency, and

4. Environmental sustainability.

Volumetric pricing enables us to internalise the environmental costs of water services. Attaining an

economically efficient outcome requires the price of water (the volumetric rate) to be set equal to

the marginal cost of supplying an additional unit of water. However, marginal cost pricing, while

economically efficient, will not allow the water utility to attain financial sustainability. The tariff

structure should therefore include an additional fixed component in order to ensure the long-run

financial sustainability of the utility’s economic model. Charges should reflect long-run operating


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costs and capital costs. The cost of providing the meters should be borne by central government as

part of its capital investment programme.

Incorporating social justice concerns should be central to water pricing policy. A universal free

allowance is an expensive, economically inefficient and unsuitable solution because much of the

benefits will accrue to wealthier households. A universal free allowance will also reduce the

environmental benefits of water charges. The most economically efficient way to protect vulnerable

households, and to prevent hardship, is to supplement the capacity to pay of low-income

households through direct cash transfers. However, because water is a merit good, direct cash

transfers are not a complete solution; that is, we want all households to actually benefit from the

use of water, not just to have a theoretical capacity to afford water. Therefore, instead of direct cash

transfers, protecting vulnerable households would be best achieved by supplementing the water

pricing model with income supports in the form of Differentiated Water Allowances (DWAs) paid for

by an intermediary, such as the Department of Social Protection. This would resolve the affordability

issue without unduly compromising either economic efficiency or the twin sustainability goals. The

cost of the DWAs should be funded through general taxation.

TASC supports the introduction of water metering. However, it will be a number of years before

each household is metered. It will be impossible during this interim period to apply volumetric

charges to all households and it will be inequitable to apply different pricing models to different

households based only on whether the household has been metered. Flat charges should not be

introduced during this interim period; they are regressive and will disproportionately impact upon

vulnerable low-income households. In addition, a flat annual charge will generate no environmental

benefits and may even be counterproductive as consumers will feel they have ‘paid’ for their water

and will have no incentive to conserve water.


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Water Charging Policy Objectives and Tensions

A water charging model must reconcile multiple policy objectives. These include (1) ensuring water

affordability and guaranteeing clean water as a social justice issue; (2) ensuring financial

sustainability for the non-profit water utility; (3) ensuring economic efficiency i.e. that water

resources are allocated efficiently, and (4) maintaining ecological sustainability and ensuring

polluters internalise the costs of their pollution (see Massarutto, 2007).

The Department of Environment, Community and Local Government’s Implementation Strategy

document for water sector reform (DECLG, 2012) contains a useful initial discussion of financing and

funding issues.

An economically efficient allocation of water is one that results in the highest return for a given

water resource (Johansson et al. 2000). The basic goal is to ensure water is allocated to its most

beneficial use. In welfare economics, the optimal path for development of the industry is where the

marginal benefit of the next increment of water supplied equals the marginal cost of supplying that

increment. From this perspective, the optimal price which will maximise society’s welfare is equal to

the marginal cost of production (Bakker, 2001). However, marginal cost pricing tends to neglect

equity issues (Mohayidin et al. 2009). In addition, ensuring financial sustainability means the price of

a service should be at least be as high as the cost of providing that service. The full cost of water not

only includes compensating resource inputs (i.e. operation costs, maintenance costs, and capital

costs: the full-supply cost), but also includes economic and environmental externalities, as well as

opportunity costs (Massarutto, 2007). Financial sustainability requires that cost recovery does not

fall below the full-supply cost. Cost recovery can be attained through tariffs, through taxes, or

through borrowings (future taxes). Water service provision is a natural monopoly with high fixed

costs and economies of scale. As a result, marginal cost pricing will not recover full costs. The water

utility will experience a loss since the marginal cost will always be lower than the average cost (Hung

and Chie, 2013).

Full supply costs = Capital costs + operation and maintenance costs + debt servicing costs (1)

Full cost = Full supply costs + economic and environmental externalities + admin

and governance costs

(2)

Environmental sustainability means ecological preservation and the minimisation of waste. Demand

side solutions include measures such as encouraging water saving through usage-based pricing.

Supply side solutions include infrastructure improvements, technology upgrades, and improved

network maintenance. Affordability issues are often considered by comparison of the water bill to

the user’s capacity to pay. For low-income groups the key consideration is not the average tariff over

the population but the size of the tariff which is paid by low-income households. While there is no

commonly agreed rule, the absolute level of affordability is often measured as a percentage of


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disposable income. In most OECD countries the average water and wastewater bills as share of

income of the lowest decile of the population is less than 2.5 per cent.

There are often tensions between different policy objectives, such as between ecological

sustainability and distributional goals. Certain trade-offs are inevitable. In order to best reconcile

these policy objectives, most OECD countries have adopted a combination of the following elements

in their tariff structures:

A. connection charges;

B. fixed charges;

C. volumetric charges;

D. block charges; and

E. minimum charges (see Rogers et al. 2002).

A study of household demand and the welfare implications of water pricing in Cyprus found that

price can be an effective tool for residential water demand management (Pashardes et al. 2000).

Charging according to the quantity of water used will motivate consumers to conserve water by

reducing demand or by switching to more efficient appliances. A general reduction in prices (e.g.

from subsidies) lessens economic and environmental signals, and leads to overconsumption. Most

though not all OECD countries use a two-part tariff structure with both fixed and variable elements

(Rogers et al. 2002). The fixed element protects the supplier from demand fluctuations, reduces

financial risk, and provides a stable revenue base. The variable element encourages conservation

and is based on consumption levels.

Water pricing mechanisms (such as marginal cost pricing) can often have negative distributional

consequences. Utilities can use tariff structures such as increasing block tariffs, or mechanisms such

as water credits, to provide affordable water to low-income households. Increasing Block Tariffs

(IBTs) are progressive to the extent the tariff structure provides a minimum necessary amount of

water at a reduced price, which is then paid for by higher prices beyond this minimum. However, to

prevent negative distributional outcomes it is often necessary to subsidise water provision, or to

adopt different pricing mechanisms for different income levels (Dinar et al, 1997; Mohayidin et al.

2009).

Charging in other countries

Water tariffs, or charges, are a normal fact of life almost everywhere in the OECD. Ireland is a

notable exception in this regard. Clean water is expensive to produce and to transport, and

ultimately must be paid for through general or hypothecated taxation, or through tariffs. Denmark

had the most expensive water service of twenty two OECD countries in 2007/2008 at €4.89 per m3

(€63.35 per month) while Portugal had the cheapest at €0.90 per m3 (€13.50 per month). Table 1

shows the average household bills across different water service providers in Great Britain for

2011/2012. The average bill is €37 per month (€444 per year) and ranges from an average of just


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over €30 per month in Severn Trent (the Midlands) to an average of just over €50 per month in the

South West of England.

Table 1: Average water and sewerage household bills in Great Britain*

Water and sewerage

company

Average household bill for

2011/12

Forecasted average household

bill for 2013/14

South West €608 €587/€646**

Wessex €504 €562

Dŵr Cymru €484 €511

Anglian €468 €511

Southern €467 €528

United Utilities €442 €478

Yorkshire €399 €433

Northumbrian (North East) €395 €422

Scottish Water €381 €393

Thames €375 €416

Severn Trent €366 €394

Companies in table to match those used by Wallace (2011) Source: Wallace (2011), Ofwat (2013), Scottish Water (2013); Converted from Sterling; Figures are based on an exchange rate of 1 Euro equals 0.85 British Pound Sterling; Median annual bill 2011/12 = €442; Median annual bill 2013/14 = €478 **Customers of South West Water will receive a £50 subsidy, bringing the forecasted average bill from €646 to €587

In February 2013, Ofwat, the Water Services Regulation Authority for England and Wales, forecast

an increase in household water and sewerage bills of 3.5%, or about £13 (Ofwat, 2013). This

increase takes into account a rate of inflation of 3% and will lead to an average bill (industry

weighted) of £388 in 2012/14, or €456 (Ofwat, 2013).

However, as can be seen from the table 1 above, these figures include sewerage services. If we look

at average household bills excluding sewerage provision, the bills are quite a bit reduced.


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Table 2: Average water only household bills for 2013/14 in England and Wales

Company Water only company Average Water Bill

2013/14

Wessex €293

South West * €270

Northumbrian (Essex & Suffolk) €260

Thames €244

Cholderton * €240

Affinity Water (Southeast region) * €239

South East * €236

Anglian €228

United Utilities €227

Bristol * €225

Sutton & East Surrey * €219

Dŵr Cymru €213

Severn Trent €208

Affinity Water (Central region) * €205

Affinity Water (East region) * €201

Yorkshire €196

Northumbrian (North East) €193

Southern €186

Sembcorp Bournemouth * €181

Dee Valley * €176

South Staffordshire * €169

Cambridge * €153

Portsmouth * €113

Industry average (weighted) €219

Source: Ofwat (2013); Converted from Sterling; Figures are based on an exchange rate of 1 Euro equals 0.85 British Pound Sterling; Median annual water only bill 2013/14 = €213 *Customers of South West Water will receive a £50 subsidy for their combined water and sewerage bill, this table does not include the subsidy.

When average household bills for water alone are considered, the average industry weighted figure

comes to €219.


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Using the British figures to illustrate what Irish water charging might look like, an annual bill of €219

averaged over 1.4 million households would yield €306.6 million of revenue annually from domestic

water charges. The range of regional averages for water only household bills in Great Britain would

yield between €158.2 million and €410.2 million if applied to Ireland.

If we apply the British figures for combined water and sewerage services, an annual bill of €456

averaged over 1.4 million households would yield €638.4 million of revenue annually from domestic

water charges. The corresponding range of regional averages for household bills in Great Britain

would yield between €551.6 million and €821.8 million.

Fitz Gerald and Morgenroth (2012) estimate that the Irish water utility would require total revenue

streams of €1 billion a year. The company sector currently pays €230 million a year and Fitz Gerald

and Morgenroth (2012) envisage €350 million in revenue could be sourced from company charges.

The remainder of €650 million that would therefore need to be sought from domestic water charges

would be very much in line with combined domestic water and sewerage charging rates in Great

Britain, but water charges alone fall short of the target.

The Government has committed to raising €500 million in 2015 through domestic water charging

(IMF, 2012). This would necessitate an average water bill of €357 per annum.

There is large variation across OECD countries in the financial burden that water and wastewater

charges place on the lowest income decile. This is shown in Table 3. Water and wastewater bills for

the lowest income decile range from 10.3 per cent in Turkey to 0.8 per cent in Iceland. The average

for the OECD is 2.3 per cent, which equates to €209 per annum for the lowest income decile in

Ireland in 2010 (based on an average income for this decile of €9,094, according to the CSO’s 2010

Survey of Income and Living Conditions).

Table 3: Average water and wastewater bills as share of income of the lowest decile of the

population

Country % Country % Country %

Turkey 10.3 Belgium 2.4 Greece 1.4

Poland 9.0 France 2.2 Switzerland 1.4

Slovakia 5.3 USA 2.2 Canada 1.3

Hungary 4.8 UK 2.1 Norway 1.2

Czech Rep. 3.9 Australia 2.1 Korea 1.1

Germany 3.5 Spain 2.0 Italy 1.1

New Zealand 3.3 Austria 1.7 Netherlands 1.1

Mexico 3.1 Luxembourg 1.6 Sweden 1.1

Denmark 3.0 Finland 1.6 Iceland 0.8

Portugal 2.7 Japan 1.5

Source: OECD (2009); OECD median = 2.1%; OECD mean = 2.3%;


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Basic Water Charging Model TASC supports the use of volumetric charges in a metered environment. The volumetric charge is

equal to the volumetric rate per m3 (cubic metre) set by the regulator multiplied by the volume of

water consumed. There is a strong case for using Increasing Block Tariffs (IBTs). Under the IBT

system the volumetric rate per m3 is increased above certain defined thresholds. Best practice

suggests the volumetric charge should be supplemented by a recurrent fixed charge to ensure the

water utility can reconcile sufficient levels of investment over the long-term with financial

sustainability. The basic tariff structure is shown as:

Increasing block tariff (volumetric charge) + recurrent fixed charge (3)

Where: Average volumetric charge is a function of the short-run marginal cost Recurrent fixed charge is a function of recurrent fixed costs including investment

Provided metering is done on an individual basis (single household) rather than on a communal basis

(multiple household) the ecological sustainability of this tariff structure appears to be high and

should encourage water savings. The inclusion of the fixed charge enables investments in upgrades

to improve water quality and availability and to reduce leakages. It is important however that the

marginal rates in the upper blocks are sufficiently high enough to encourage conservation. This tariff

structure is in accordance with economic efficiency and financial sustainability provided the average

volumetric charge is equal to the short-run marginal cost of water provision and provided the

recurrent fixed charges are equal to average recurrent fixed costs. As argued by Dinar et al (1997)

efficient water pricing mechanisms almost invariably have negative redistributional implications.

These negative effects can be eliminated by incorporating differentiated income supplements, such

as differentiated water allowances or direct cash transfers, to support low income and other defined

groups.

Protecting Low-Income Households

Service charges, like consumption taxes, are generally regressive. Care must be taken that low

income households and those with particular needs are protected. There are a number of policy

options that can be availed of to reduce the burden of water charges on low-income households.

Table 4 outlines common policy options adopted by thirty different countries according to the

OECD’s 2006 publication on water experiences in the OECD. Income supports were used by every

country, while fourteen out of thirty OECD countries forbade disconnection of water supply.

Substantial subsidies for water and sanitation supply, reduced prices for certain groups, progressive

water tariffs, and reduced VAT on water, were all commonly used by OECD countries as measures to

increase affordability. TASC proposes that water services should be charged at the zero rate of VAT.


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Table 4: Affordability measures for domestic users in the OECD

Measure taken No. of countries

Income support for low-income households 30

No disconnection of water supply of low-income households with arrears for

water

14

Subsidies for water supply and/or sanitation over 30% of total service cost 13

Progressive water tariff in general use 13

Social water tariff (reduced price for certain groups of users) 12

VAT on water below normal rate 11

Unmetered (cheap flat rate tariff) 9

Targeted assistance i.e. grants or forgiveness of arrears for low-income

households

8

No fixed fee (only proportional fee) 6

Reduced waste water tax or other water charges for low-income groups 3

Provision of a first block at zero price for low-income households or all

households

2

Out of 30 OECD countries Source: OECD (2006), Table 6

Water is an economic good and in principle there is no compelling rationale for water to be treated

differently to other essential goods such as food, shelter and energy. The problem of water

affordability and equity can be considered in two ways. We can treat the problem as being that

water is too expensive, or we can treat the problem as being that certain people do not have enough

resources (TASC, 2012). There are therefore two broad strategies that can be used to resolve the

affordability and equity problem.

The first strategy is to reduce the price of water. The alternative strategy is to supplement the

incomes of those on low income. The more efficient way to resolve the affordability problem from

an economic efficiency perspective is to allow the price to be set as normal, but to then supplement

the capacity to pay of those with low disposable incomes. This strategy avoids price distortions and

directly addresses the distributional issue. The alternative strategy of reducing the price of water via

a universal free allowance, universal subsidy, or some similar mechanism will lessen the degree of

water conservation and will also lessen the allocative efficiency of water use. A universal free

allowance would contravene the ‘polluter pays’ principle and would be a poorly targeted and

wasteful method of solving the affordability problem. Low-income and other households with

special needs can be better protected, and less expensively, by supplementing their income.

While an income supplement will require funding from general taxation, the proposed policy of a

universal free water allowance could require even greater State funding depending on the

generosity of the allowance. Universal free allowances represent bad value as measures to help

those on low income because, to provide a small subsidy to low-income households, the

Government will have to subsidise water for all households regardless of means and circumstances.


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Any universal free allowance would have to be subsidised either through higher charges on use

above the universal free allowance or through general taxation. Higher charges above the universal

free allowance would also be suboptimal from the perspective of economic efficiency. In addition,

unless the universal free allowance is differentiated by household it will disadvantage larger

households relative to single person households, and will also disadvantage those with greater water

requirements. The Commission on Taxation (2009), argued against the introduction of a free water

quota in its report in 2009. It argued that a relatively generous quota would not encourage

conservation and a low quota per household member posed significant administrative difficulties.

(Commission on Taxation, 2009) The universal free allowance is clearly an inefficient social policy

and one that will lead to over-consumption of water with negative environmental consequences.

There are a number of superior alternatives to the universal free allowance. From the perspective of

both economic equality and economic efficiency it is preferable to charge the full cost of water,

including the cost of environmental externalities, and to then provide lower income households with

some form of income supplement, in order to avert hardship.

Differentiated Water Allowances

Income supplements could come in the form of differentiated water allowances or direct cash

transfers. Under a system of Differentiated Water Allowances (DWAs), a designated Government

Department would directly contribute to the water bill for each household up to a value equivalent

to that household’s DWA, albeit a contribution no greater than the exact cost of the household’s

water bill. Each household’s DWA would be calculated based on the characteristics of the household,

for example, the household’s disposable income, the number of people in the household and any

special need for water (e.g. certain forms of disability). For the majority of households the DWA

would be set at zero.

Water is a merit good because there is a public interest in ensuring, for public health purposes, that

each household uses a certain minimum amount of water (e.g. hand-washing). The DWA model

would help ensure that those on lower incomes would not decrease their water consumption below

a level which is necessary to maintain public health.

Direct cash transfers would be more expensive for the exchequer than the DWA model, but would

have the advantage of providing the recipient household with greater choice over their household

expenditure. Direct cash transfers would be more economically efficient than DWAs but would not

deal with public health concerns as effectively as would DWAs. This is because the social health

benefits of water usage exceed the private benefits of water usage, and therefore the willingness to

pay for water services is below the socially optimal level (Hall and Lobina, 2010); in other words,

there is a risk that people affected by poverty will use direct cash transfers for other essential items,

and reduce their use of water below the optimum level for their health and public health generally.

A variation on the DWA model is the cross-subsidisation model. The cross subsidisation model is

similar to the DWA model with the important exception that higher income households would


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receive a negative water allowance, i.e. an additional charge, and this additional charge would offset

the positive water allowances allocated to lower income households. The cross subsidisation model

is likely to be difficult to implement administratively and politically and leads to over-consumption

by subsidised consumers and under-consumption by subsidising consumers (Hung and Chie, 2013).

The different water charging models are compared in Table 5.

Table 5: Comparison of Water Charging Models

Model Admin.

complexity

Subsidises Size of

subsidy

Cost

borne

by

Socio-

environment

benefits

Cost to

exchequer

Universal Free

Allowance

Low All Fixed General

taxation

Low 3 (Highest)

Direct Cash

Transfer

Medium -

low

Lower

income

households

Variable General

taxation

High (but

public health

risks)

2

Differentiated

Water

Allowances

Medium -

high

Lower

income

households

Variable General

taxation

Medium 1

Cross

Subsidisation

High Lower

income

households

Variable

(sometimes

negative)

Higher

income

users

Medium to

High

0 (Lowest)

Differentiated income supplements should not be confused with a universal free allowance which is

an inefficient way of solving the affordability problem. The income supplement can be funded

through cross subsidisation by higher income groups or can be funded by direct State payments.

Cross-subsidisation is likely to be more progressive than funding from general taxation. However

there are likely to be major administrative complexities associated with developing a cross-

subsidisation model. For this reason TASC recommends that income supplements in the form of

household-differentiated water allowances (DWA) be adopted and that they be funded from general

taxation. Income supplements in the form of DWAs would be less expensive that direct cash

transfers and would be less administratively burdensome that a cross subsidisation model.

Households could be automatically assessed as part of the process of meter installation with

subsequent assessments occurring at defined intervals and automatically triggered upon a change in

occupancy. Most households would receive a DWA set at zero.


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TASC’s proposed equality-proofed tariff structure, which attempts to reconcile the four key policy

goals discussed earlier, is shown as:

Volumetric charges using increasing block tariffs + recurrent fixed charge -

differentiated income supplements to low income and other defined groups

(4)

The exact size of the water allowance (or other income supplement) for each household should vary

depending on the characteristics and circumstances of the household. Examples of relevant

characteristics include household income and household size. The average water and wastewater bill

as share of disposable income of the lowest income decile of the population is 1.1 per cent in

Sweden, the Netherlands, and Italy. This equates to around €100 per annum in the Irish context. If

we take the average water only bill in the UK (€219 per annum), a €100 yearly average payment for

the lowest income decile would need a 54 per cent subsidy if applied in Ireland. However, if we take

the UK water and sewerage average bill of €456 a 78 per cent subsidy of the water bill would be

needed. The projected average annual bill of €357 (see page 10) in 2015 would require a subsidy of

72 per cent for the lowest income decile. This would represent an average DWA for this group of

over €250. The size of the household’s water allowance should decrease gradually as income

increases.

As discussed above, there is no commonly agreed rule on what constitutes water affordability, but it

is generally understood to mean the users capacity to pay. That is the share of net income used to

pay the bill. However, measuring water affordability is difficult and complex. Any measure or

indicator chosen will “inevitably reflect a judgement about the relationship between water . . . and

other household needs. So, for individual customers, how difficult they find it to pay their water and

sewerage bills will depend on a range of factors – including demands on their household income.”

(Ofwat, 2011: 8) An independent advisory group was established by Ofwat to examine suitable

approaches and developed an indicator based on the percentage of income (after housing costs)

that was spent on water and sewerage services. The group settled on indicative thresholds of above

3% of household income spent on water bills. In most OECD countries the average water and

wastewater bills as share of income of the lowest decile of the population is less than 2.5 per cent

The Department of Social Protection should be given responsibility for setting the thresholds for

water affordability and for assessing the needs of households based on these thresholds and

corresponding levels of DWAs.


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Annex: Financing over the Interim Period

TASC supports the introduction of water metering. For equity reasons, efficiency reasons, and

environmental reasons, metering and volumetric charging form an appropriate basis for water

charging and should be preferred to fixed charges wherever it is feasible to install meters. A

universal metering programme is the correct approach and is preferable to the approach of

metering selected classes of property and is also superior to the opt-in approach. During the 1990s

in England and Wales (when metering was incomplete) some consumers with metered supplies were

paying significantly more per unit volume than consumers with non-metered supplies (Bakker,

2001). However, an interim period characterised by regressive and inefficient flat charges offers little

advantage and should be avoided. An economically efficient allocation of water is not attainable

with flat rate charges. Metering will produce an economically more efficient outcome than a flat rate

charge and is consistent with the ‘polluter pays’ principle.

It will be around three years before all households can be metered. Nevertheless, the alternative of

a simple flat rate water charge as an interim measure would be deeply regressive and would provide

no incentive to use less water. A flat rate water charge would in fact encourage an increase in water

use, as householders will feel they have ‘paid’ for the water and are therefore entitled to use it as

they see fit. Financing of water and waste water services through general taxation is more

progressive than a flat rate charge. A flat rate charge will disproportionately impact on low-income

groups. Water charges should not be introduced until such time as all households, where it is

feasible to do so, are installed with water meters.

Government should also resist the introduction of other non-volumetric charging bases. The

Department for Environment, Food and Rural Affairs, UK (DEFRA) established an Independent Review

of Charging for Households and Sewerage Services, which compared the different charging bases

against eight defined fairness principles. As can be seen in Table 6 (on page 17), only volumetric

charging, which depends on meters, satisfies the fairness test.

Publicpolicy.ie also examined the possible use of proxies as interim measures in lieu of metering (De

Buitléir, 2013). It focused on three possible measures, temporary surcharge on property tax

liabilities, an increase in the rate of VAT on electricity or an increase in carbon tax. Similar to the

findings of the Walker report, De Buitléir argues that property valuations are a poor proxy for water

consumption. He finds that electricity consumption is “a reasonable proxy for water consumption”

but if VAT on electricity is moved to the standard rate than it cannot be moved back due to EU rules

(De Buitléir, 2013: 2). Finally, he examines the possibility of raising carbon tax but argues that it is

also a poor proxy for water consumption. Thus, volumetric charging through use of meters is the

only fair way of charging for water use. Interim measures such as flat rates or use of proxies should

not be introduced.


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Paying for Water

Table 6: Comparison of charging bases against fairness principles

Principle Flat rate Volume Rateable

Value

(similar to

property

tax band)

Household

Occupancy

Bedrooms Property

Type

Water efficiency

incentive

No Yes No No No No

Cost-related No It can be No No No No

Polluter pays No Yes No Partly No No

Affordable No No No No No No

Fair to companies Yes Yes Yes Yes Yes Yes

Simple and

transparent

Yes Yes No Yes No No

Administratively

feasible

Yes Yes Yes No Yes Yes

Intergenerational

equity

n/a n/a n/a n/a n/a n/a

Source: Walker, A, (2009)

The meters themselves should be paid for by central government as part of the capital budget. The

alternative is a regressive flat rate charge. The debt servicing costs from the investment in water

meters should not be borne by the utility itself. Instead the cost of the water meters should be

considered an equity investment by the Irish people.


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Paying for Water

References

Bakker, K. J., 2001, Paying for Water: Water Pricing and Equity in England and Wales, Discussion

Paper, Department of Geography, Oxford University

Commission on Taxation, Report, 2009

De Buitléir, D., 2013, Water Charges: An Interim Scheme, Publicpolicy.ie

Department of Environment, Community and Local Government, 2012, Water Sector Reform:

Implementation Strategy, October 2012

Dinar, A., Rosegrant, M. W. and Meinzen-Dick, R., 1997, Water Allocation Mechanisms: Principles

and Examples, World Bank Policy Research Working Paper No. 1779

Fitz Gerald, J. and Morgenroth, E., 2012, Submission to the Department of the Environment,

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IMF, Country Report No. 12/336, December 2012

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Water Pricing in Cyprus, University of Cyprus Discussion Paper 2001-0

http://www.ofwat.gov.uk/mediacentre/pressnotices2008/prs_pn0313bills


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Paying for Water

Rogers, P., De Silva, R. and Bhatia, R., 2002, Water is an Economic Good: How to Use Prices to

Promote Equity, Efficiency, and Sustainability, Water Policy 4, pp. 1-17

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the Establishment of a Public Water Utility and the Future Funding of Water Services, February

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Experience, IIEA Seminar, 9 November

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http://www.scottishwater.co.uk/you-and-your-home/your-charges/2013-2014-charges

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Documents

TASC Paying for Water